Worcester may owe $2 million after HUD audit of block grants

Sunday

Jun 16, 2013 at 6:00 AMJun 17, 2013 at 4:57 AM

By Nick Kotsopoulos TELEGRAM & GAZETTE STAFF

City officials anticipate as much as $2 million in federal funds allocated by the city to local nonprofit housing groups over a three-year period will be deemed ineligible for federal reimbursement by the U.S. Department of Housing and Urban Development.

That means the city would have to repay that money to HUD. In turn, city officials have already made it clear they intend to seek to recoup that money from those agencies.

City Manager Michael V. O’Brien said it is expected that a final HUD audit looking into contracts awarded by the city through the federal Community Development Block Grant program will be completed in mid-July.

The audit is looking into block grant allocations made during fiscal years 2010, 2011 and 2012.

Based on initial draft information provided by HUD, Mr. O’Brien said, city officials believe that approximately $2 million of funded, contracted activities over those three years will be deemed ineligible.

He emphasized that the terminology “ineligible” does not mean that the federal funds were misappropriated. Instead, he said, it means the funded activities did not demonstrate with appropriate documentation that an HUD national objective was accomplished within the contract year.

As a result, he said, that money must be repaid.

“The HUD audit will highlight the issues in the city’s past contracts and monitoring processes that allowed payment for ineligible outcomes,” Mr. O’Brien wrote in a report that goes before the City Council Tuesday night.

“It is clear that the city should have scoped projects to require sub-recipients to produce more specific outcomes, monitored progress toward completion of these outcomes and paid for only eligible accomplishments in that (block grant) contract year,” he added. “HUD contracted with the city to oversee these dollars in compliance with all HUD regulations and the city did not manage to full compliance in all cases.”

The manager said city officials and representatives from those nonprofit agencies that received the block grant funding in question are in the process of responding to HUD’s draft audit comments.

He said HUD has made it clear that they prohibit the distribution of draft audit information until they complete their final report.

He added that the city sought and received permission from HUD to provide each impact agency with financial information regarding their ineligible activity so they can have an opportunity to provide feedback.

“We will submit a formal response to HUD by June 25,” Mr. O’Brien said. “By mid-July, HUD’s Office of Inspector General will submit the final audit to the HUD Boston regional office. Upon receipt, the HUD Boston regional office has 120 days to create a management plan for resolution of the audit findings.

“Ultimately, that management plan will include a repayment plan of all ineligible activities,” he added.

Mr. O’Brien last summer asked federal housing officials to audit the city’s block grant program after an initial HUD audit faulted some local nonprofit housing agencies for a range of noncompliance issues.

Under HUD rules, block grant money must be spent directly on housing production or on other services that help low-income residents, such as foreclosure counseling.

“Over the last two years, I have taken numerous steps to improve the manner in which our federal entitlement programs are managed,” Mr. O’Brien said. “Following the city’s thorough review and analysis of the federal programs in 2011, I made it clear that business as usual — following the same funding and monitoring practices that had been in place for decades — could no longer be the norm.”

The HUD national objectives when it comes to housing are: benefit low- and moderate-income persons; aid in preventing or eliminating slums or blight; address a need with a particular urgency because existing conditions pose a serious and immediate threat to the health or welfare of the community.

Mr. O’Brien said the city worked with neighborhood-based community development corporations for many years to achieve HUD’s national objectives. But he said problems arose because not all executed contracts with those agencies resulted in the accomplishment of a national objective within the contract year.

“If the city funded an organization to plan and construct housing, but the housing units did not come online or secure occupancy until after the contract period, the funding is ineligible and must be repaid,” the manager said. “Alternatively, if the city funded an organization to provide housing counseling for neighborhood residents, but counseled individuals did not complete the purchase of new housing, that funding is ineligible and must be repaid.

“In each of the instances discussed with HUD, we have no indication of malfeasance or inappropriate activity,” he added. “Instead, in most cases, the sub-recipients, and therefore the city, were unable to illustrate compliance with HUD regulatory required outcomes.”

The manager pointed out that he has taken significant steps to address the issues raised by the audit.

“We have fully adapted to HUD’s specific surgical focus on national objectives, and while that has made for significant changes in external funding expectations and a difficult transition after decades of limited change, we are confident that we have built a strong framework for all federal funding programs moving forward.”